Health Check: How Prudently Does WMG Holdings Bhd (KLSE:WMG) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, WMG Holdings Bhd. (KLSE:WMG) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for WMG Holdings Bhd

How Much Debt Does WMG Holdings Bhd Carry?

The chart below, which you can click on for greater detail, shows that WMG Holdings Bhd had RM245.0m in debt in March 2022; about the same as the year before. On the flip side, it has RM16.7m in cash leading to net debt of about RM228.3m.

How Healthy Is WMG Holdings Bhd's Balance Sheet?

We can see from the most recent balance sheet that WMG Holdings Bhd had liabilities of RM172.8m falling due within a year, and liabilities of RM98.2m due beyond that. Offsetting these obligations, it had cash of RM16.7m as well as receivables valued at RM39.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM214.8m.

This deficit casts a shadow over the RM91.1m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, WMG Holdings Bhd would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since WMG Holdings Bhd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, WMG Holdings Bhd made a loss at the EBIT level, and saw its revenue drop to RM56m, which is a fall of 9.1%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months WMG Holdings Bhd produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at RM647k. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of RM20m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that WMG Holdings Bhd is showing 2 warning signs in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.